Profit Mark Up vs Margin

Article by Hajara Saleeth    2 Comments  

Cost based pricing can be done using 02 methods:

1. Mark up method
2. Margin method

Difference between these 02 methods can be illustrated as follows

Mark Up Method

This is where the company decides to add a percentage of cost as the profit to arrive at the selling price of a product. Mark up can be based on total cost/prime cost/ overheads/production cost or any other cost arises in the organization. Concept is that it should use a % of a certain cost to arrive at the profit figure. Based on above concept the formula for mark up method can be stated as follows:

Total/Prime Cost+ Profit Mark Up = Selling Price

100% + X% = (100+X)%

Example :

Firm wishes to achieve a 20% of a profit mark up on its total cost and total cost of product A is calculated as $ 100. Calculate the profit figure and the selling price.

Total  Cost+ Profit Mark Up = Selling Price

100% + X% = (100+X)%

100% + 20% = 120%

Therefore when Total cost is $ 100:

Total  Cost+ Profit Mark Up = Selling Price

$ 100 + $ 20 = $ 120

Margin Method

This is where the firm decides a certain percentage on selling price has to be the profit amount. Calculation starts from the selling price and they decide on the percentage of profit and then decide what has to be the cost figure.If the cost figure is given working backwards has to be done to identify the profit figure and the selling price.  Based on this concept the the profit figure based on profit margin method can be calculated using the formula stated below:

Total Cost  + Profit Margin = Selling Price

Selling price = 100%

Profit Margin = X%

Total cost = 100% – X%

Therefore:

Total  Cost+ Profit Mark Up = Selling Price

(100%-X%) + X% = 100%

Example:

Firm wishes to achieve 20% of profit margin on its sales price when its total cost of production is $ 100. Calculate the profit figure and the selling price.

Total  Cost+ Profit Mark Up = Selling Price

(100%-X%) + X% = 100%

(100%-20%) + 20% = 100%

80% + 20% = 100%

If 80% = $ 100

20% = $ 100/80*20 = $ 25

Therefore the selling price has to be:

$ 100 + $ 25 = $ 125